Banks feel FOMO as SEC rules keep them out of crypto custody

Happy Friday. Earlier this week, I stopped by the Milken Institute’s glamorous annual conference in Los Angeles, where I met State Street’s chief product officer, Donna Milrod. He has an impressive knowledge of the history of Wall Street and, in particular, the business of custody (the unassuming but vital task of holding client assets and keeping them safe). Milrod also made clear that State Street, the second-oldest bank in the United States, is eager to get into the crypto game.

“We’re raring to go,” Milrod told me, showing why his bank, the world’s largest custodian, might be the best and safest choice to protect billions of dollars worth of Bitcoin held by major financial players. It looks like BlackRock. Unfortunately, when the SEC approved BlackRock and 10 others to launch Bitcoin ETFs in January, State Street was on the outside looking in; instead, cryptocurrency custodian Coinbase took over as custodian for all but one of the new funds.

The reason State Street isn’t participating in the custody game—stop me if you’ve heard this before—is the SEC’s unusual regulatory choices. The agency has issued guidelines specifically saying that for accounting purposes, firms must list crypto assets held on behalf of others as both assets and liabilities on their balance sheets. You don’t need to be an accountant to see that there’s something odd about this, especially since non-crypto assets held in escrow don’t appear on the balance sheet. One former State Street executive even went so far as to describe the rule as “crazy.”

The frustration is understandable. While the accounting rule is that holding cryptocurrency means a loss (as assets and liabilities balance out), this is a problem for banks as the capital cushion they must hold is determined by the size of their balance sheets. This is yet another example of Gary Gensler’s SEC trying to restrict crypto by any means necessary, even if it means playing fast and loose with the letter of the law.

While such tactics keep companies like State Street out of crypto for now, it appears the SEC is fighting a losing battle. Banks are rapidly adopting blockchain technology, and it is only a matter of time before crypto elements are integrated into all parts of the financial system. Meanwhile, crypto advocates are clearing Gensler’s regulatory hurdles in the courts and Congress. For example, this week the Parliament decided that the average age almost half that of the party leader. It’s a matter of time.

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If you’re in New York this week and interested in the rapidly evolving world of finance, I’ll be co-chairing the Fortune Future of Finance: Technology and Transformation summit at the Park Hyatt next Thursday. The event will feature top executives from companies ranging from BlackRock to PayPal to Coinbase, and will include a special dinner keynote with Anthony Scaramucci and Andrew Yang on finance and the 2024 elections. There are a few tickets left; you can find more here. Have a great weekend.

Jeff John Roberts
[email protected]
@jeffjohnroberts

This story first appeared on Fortune.com